Trade tensions between China and the European Union reached a new high on 12 June, with the EU imposing new provisional tariffs on Chinese battery electric vehicles (EVs), and China threatening to retaliate. The move came as part of an ongoing investigation launched by the European Commission in October to evaluate the Chinese electric vehicle value chain, which found that EVs benefited from unfair subsidies, in turn threatening the EU’s economy and competitiveness.

During the probe, the European Commission investigated three Chinese producers, BYD, Geely, and SAIC, which will see now their respective duties increase by 17.4%, 20%, and 38.1%. Other producers who cooperated with the investigation will be subjected to an average duty of 21%, while those who did not cooperate will face a duty of 38.1%.

The new provisional duties are expected to enter into force on 4 July, unless both parties resolve the issue through discussions within the framework of the World Trade Organisation (WTO). Depending on the progress of the negotiations, definitive tariffs could also be imposed within four months after the imposition of the provisional ones. For now, the duties are subject to a vote during an upcoming European Council meeting. Although certain EU members, notably Germany, which has stronger trade ties with China, have expressed reservations about imposing new tariffs and warned against entering a “trade spiral,” the vote is not expected to be difficult.

For the EU Commission, the goal is not to start a trade war but to restore the level playing field with China, which already charges a 15% tariff on any foreign-made vehicle, against the EU’s lower tariff of 10%. In this regard, with the new duties, set to be applied on top of the ordinary 10% figure, certain brands would now see tariffs reach nearly 50% to remedy market distortions. Indeed, according to some EU officials, China’s unfair subsidies can be found throughout the entire value chain – from mining lithium, refining minerals and steel-making, to battery and car production, as well as shipment.

Chinese officials have already threatened retaliation: a few days prior to the investigation’s preliminary conclusions, the Chinese Commerce Minister sent a letter to EU Trade Commissioner Valdis Dombrovskis calling for a truce but signalling potential reprisals as well, starting with the aviation and agriculture sectors. This could have a significant impact on the EU, as China is the third destination for the bloc’s agricultural exports. Last January, China had already launched an anti-dumping probe investigating European liquor producers, particularly French cognac, with China being the second destination for French cognac exports.